Evidence-Based Investing

Retirement-Ready Planning

How to Avoid Being Victimized by Financial Deception

“I’m calling it — this is an Apple commercial,” said my 14-year-old son, about halfway into the visually stunning emotional appeal for educational experimentation that appeared on our TV while we were otherwise dedicating ourselves to one of the best college football games of the season.

Yes, it’s about that time again, when companies are rolling out new commercial campaigns in conjunction with some of the year’s most viewed sporting events–beginning with the college football playoff and culminating, of course, with the only spectator sporting event where no one wants to cede their seat during the commercials, the Super Bowl.

“I think you’re right,” I said to my son (especially gripped because the commercial featured a young man sharing a defining moment with his beloved parents via his smartphone), just as the musical crescendo sent a chill down my spine.

But then came the verdict.

It wasn’t Apple, after all, even though the tech company is known for its artistic commercial flair in imploring viewers to engage technology in the most relational ways. It was a mainstay financial company inviting us to bring the benefit of our long-term financial planning for the future into the present.

Brilliant.

“Wait a minute, though,” I said to my boys, “These guys are notorious for hard-selling over-priced insurance policies for big commissions!”

“Whatever they are, it’s a great commercial,” my 12-year-old son concluded before the Oklahoma Sooners and the Georgia Bulldogs again filled the screen.

He was absolutely right. But as I reflected on the power of this particular message and medium, I’ve had this lingering sense that there’s a real danger present.

Sure, we know to be wary when opening the email from a heretofore unknown distant relative in a foreign land inviting us to collect our inheritance, or when we approach a used car lot, or when we see one of those horribly produced local attorney commercials asking if we’ve been hurt in an accident.

But for years, household-name financial companies have been attempting to convince us through commercial messaging that their primary goal is to improve our lives–to help us toast the new beach house, celebrate the accomplishments of our children or launch that new sailboat–when the evidence seems to suggest the lives they first seek to improve are their own.

Indeed, the company behind these great new commercials–implicitly pledging to put you and your family first–has gone on the record as being opposed to a rule that would legally require them to act in the best interests of their clients at all times.

So, how can you help ensure that you’ll not become a victim of financial deception, however tempting a commercial or individual plea may seem? Consider these two simple steps:

1) Only work with a full-time fiduciary.

It seems like a simple expectation, right? That your financial advisor would pledge to only act in your best interest, and not to allow their personal (or their company’s) profit motive to compromise the very best advice for you? But, unfortunately, it’s not that simple. And by applying this first rule, you’ll likely eliminate many who’ve adopted some version of the “financial advisor” label from the competition to be your financial advisor.

One of the reasons you have to be so careful today is that many who hold themselves out as financial advisors are, indeed, fiduciaries–but only part-time. If your advisor has passed the requisite Securities and Exchange Commission (SEC) exams that license them to charge a fee for investment and financial advice, they are required to act as a fiduciary when operating in that capacity. But they may also sell stocks, bonds, mutual funds, REITs, annuities and life insurance policies for a commission, in which case they are held to one of multiple lesser standards.

Do they tell you when they take the fiduciary hat off and put the sales hat on?

There has been some movement on this front. The SEC has enforced some version of a fiduciary obligation for those under its purview since 1940, and the Department of Labor is attempting to implement a rule requiring that anyone offering advice on a client’s 401(k) or other retirement-specific account do so as a fiduciary. But you can set your own, even stricter standard by choosing to work only with a full-time fiduciary.

If you’re looking to get something in writing, the strongest, clearest language I’ve seen is the Fiduciary Oath required of anyone who is a member of the National Association of Personal Financial Advisors (NAPFA).

2) Only work with an advisor who puts you at the center of the planning.

While it is certainly true that not every non-fiduciary is a bad advisor (although I still wouldn’t settle for anything less), it’s also true, unfortunately, that not every fiduciary is a good advisor. There are those who’ve chosen to align their business practices with a fiduciary standard primarily because they think it’s good for business. And there are others who are good fiduciaries but simply bad practitioners.

Bad advisors may have a lack of experience or education, but it may also be that they are suffering from the self-deception that they–or their investment philosophy or planning process–are the secret to your success. This perspective may even be a problem baked into the industry norm, its apparent purpose being to create a facade that can compete with the behemoths who can afford great prime-time commercials.

Signs that you’re working with a self-centered planner are that they dominate the conversation with their accomplishments and the preeminence of their or their firm’s success, or that your recommendations seem decidedly generic and aren’t framed within the context of your values and goals.

Signs that you’re working with a client-centered planner are that you remain the focus on both a macro and micro level. The planning engagement should begin with you and what’s most important to you and your family before moving on to your money. Then every conversation in the future should be driven by your agenda, not the advisor’s, and all additional planning should be reconnected back to your values and goals.

(Note: While being a genuinely client-centered financial planner is really just good financial planning–and it’s a method that many good fiduciary advisors have practiced for years–there are those who’ve sought to bolster their strengths via additional training in a technique called “financial life planning,” or simply “life planning,” through educational bodies like the Kinder Institute and Money Quotient.)

I’m a little sensitive to this whole commercial thing, but that’s because the ideal portrayed in these and other great financial industry commercials profoundly shaped, in part, my early career. I wanted to be clients’ trusted advisor, and that’s what all the marketing collateral, and even the interview processes, portrayed. But it took me fully nine years of weaving my way through the industry proper to discover where true financial advice resides.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

How to Manage Your Money in 2018

With markets hitting record highs and a new tax plan in place, there’s a lot in play when it comes to balancing your finances. A member of our team, Tim Maurer visits with the TODAY show’s Sheinelle Jones and Craig Melvin to discuss managing debt, saving for the future and investing long-term.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

Checking in on 2017’s ‘Sure Things’

At the start of 2017, I compiled a list of predictions that gurus had made for the upcoming year, along with some items that I hear frequently from investors, for a sort of consensus on the year’s “sure things.” I’ve kept track of these sure things with a review at the end of each quarter.

With the turn of the calendar, our third quarter review of 2017’s list is due. As is my practice, I’ll give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.

Bonds & Stimulus

Our first sure thing was that the Federal Reserve would continue to raise interest rates in 2017, leading many to recommend investors limit their bond holdings to the shortest maturities. Economist Jeremy Siegel at one point even warned that bonds were “dangerous.” And on March 15, 2017, the Federal Reserve did raise interest rates by 0.25%. It did so again on June 14, 2017.

The second sure thing was that, with the large amount fiscal and monetary stimulus we have experienced, in addition to the anticipation of a large infrastructure spending program, the inflation rate would rise significantly. On September 14, 2017, the Bureau of Labor Statistics reported that in August the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4% on a seasonally adjusted basis. The agency also reported that the index for all items rose just 1.9% over the last 12 months. The index for all items less food and energy had risen just 1.7% over the 12 months prior to that. Score: -1.

The third sure thing was that with the aforementioned stimulus, anticipated tax cuts and a reduction in regulatory burdens, the growth rate of real GDP would improve from its 1.6% growth in 2016 to 2.2% this year. But first quarter growth was just 1.2%. The second quarter came in better at 3.1%. The current full-year forecast from the Philadelphia Federal Reserve’s Survey of Professional Economists is for growth of 2.1%. We’ll give this a score of +1.

Our fourth sure thing follows from the first two. With the Fed tightening monetary policy and our economy improving—and with the economies of European and other developed nations still struggling to generate growth, and with their central banks still pursuing very easy monetary policies—the dollar would strengthen. The dollar index (DXY) ended 2016 at 102.38. The index closed the third quarter at 92.88. Score: -1.

The sixth sure thing was that, with the Shiller cyclically adjusted price-to-earnings (CAPE) ratio at 27.7 as we entered the year (66% above its long-term average), domestic stocks are overvalued. Compounding the issue with valuations is that rising interest rates make bonds more competitive with stocks. Thus, U.S. stocks would be likely to have mediocre returns in 2017. A group of 15 Wall Street strategists expects the S&P 500, on average, to close the year at 2,356. That’s good for a total return of about 7%. As noted above, VOO already has returned 14.2% in just the first nine months of the year. Score: -1.

The seventh sure thing was that, given their relative valuations, U.S. small-cap stocks would underperform U.S. large-cap stocks this year. Morningstar data showed that, at the end of 2016, the prospective price-to-earnings (P/E) ratio of the Vanguard Small Cap ETF (VB) stood at 21.4 while VOO’s P/E ratio stood at 19.4. Through September 30, 2017, VB returned 10.6%, underperforming VOO, which, as we stated, returned 14.2%. Score: +1.

The eighth sure thing was that, with non-U.S. developed market and emerging market economies generally growing at a slower pace than the U.S. economy (and with many emerging markets hurt by weak commodity prices, slower growth in China’s economy, the Fed tightening monetary policy and a rising dollar), international developed market stocks would underperform U.S. stocks in 2017. Through September 30, 2017, the Vanguard Developed Markets ETF (VEA) returned 21.0%, outperforming VOO. Score: -1.

Our final tally for the period shows that six “sure things” failed to occur while just two happened. I’ll report back again at the end of the fourth quarter for a full-year accounting. The following table shows the historical record since I began this series in 2010.

Year

Number of Sure Things

Yes/True (+)

No/False (-)

Tie/Draw

2017 Q3

8

2

6

0

2016

8

2

6

0

2015

8

3

4

1

2014

10

3

7

0

2013

7

2

5

0

2012

8

3

4

1

2011

8

1

7

0

2010

5

1

4

0

Total

62

17

43

2

The table shows that only a little more than 25 percent of “sure things” actually came to pass. Keep these results in mind the next time you hear some guru’s forecast.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.